During the period of the pandemic, a number of supplier firms have engaged in “anti learning” behavior. Antilearning behavior involves workers improperly executing their procedures, no one making the necessary corrections, and the improper process becomes a normal part of regular operations. Whether CFOs and their partners are still neck-deep in supply issues, or dealing with the aftermath, they must be better prepared for new crises. Such preparation requires a reorganization and rethinking of how finance leaders interact with supply and procurement functions, a solid strategy in exploiting leading software solutions, and properly prioritizing customer profitability. The following five sections will spell out some quality crisis management tips that must be taken by finance leaders in light of the supply chain issues in this unique corporate landscape.
5 Supply Chain Crisis Management Tips
1. Cultivate supply chain resiliency:
In light of supply chain chaos, enterprises have scrambled for redundant suppliers and secondary markets to source items from. If the corporate world encounters a serious mess of problems again, organizations will need a fallback plan. Enabling agility among supply chains is a crucial step. For instance, if all the port workers in your area go on strike for several months, you need a process to switch quickly to alternate item source networks.
At the same time, companies should also bolster their relationships with primary suppliers. CFOs should begin developing deep, mutually beneficial partnerships with vendors. Finance leaders may even want to consider including such vendors in their production planning. The better these relationships are, the less likely it is for production to experience interruptions.
2. Change approach to supply chain and procurement functions:
Finance leaders may have to add staff to procurement teams or engage expert partners. This potential need is because existing supply chain teams typically waste a lot of time on seizing consistent supply sources. Procurement functions don’t have the time to critically analyze the supply base and consider innovations that could mitigate future costs. Finance leaders must take initiative and delegate procurement professionals to identify and then execute on coming waves of optimization opportunities.
Additionally, organizations should also reimagine how they compensate supply chain managers. Their pay is too often based on managing the expenses of goods sourced. This has unfortunately created a gratuitous adherence to a lean management philosophy, and thus insufficient inventory availability.
Another critical consideration in regards to performance based pay is the unavailability and untimeliness of materials for urgent production to support a large increase in demand. Managers’ performance-based pay instead should be based upon contribution to revenue derived from efficient and high quality production, because at the end of the day, revenue will trump costs.
3. Align Customer Profitability with Product Allocation:
Executing this particular step requires finance leaders to ask themselves some critical questions:
• Which are my most profitable customers?
• Which products are most important to these customers?
• How can I ensure that my most profitable customers get full allocations of scarce products?
• How can I manage my customer product allocations to convert many of my money-losing customers to high-profit?
FP&A Software is the key to answering these questions, and maximizing your long-term profitability. Certain FP&A software can calculate the full all-in profitability of every transaction of every customer. Adopting systems such as this can create an accurate view of the true profitability of literally even the most minute components of your organization in a few weeks. This view of granular profitability by customer and product is critical to managing supply chain disruptions and maximizing your long-term profitable growth.
Most CFOs intuitively understand that some of their customers produce high profits, while others drain profitability, and many other customers have little profit effect. FP&A software empowers your organization to identify the exact profitability of each of your customers and products. According to recent studies from ChiefExecutive.net, the following profit pattern almost always emerges:
• Profit Peak customers: Large high-profit customers, who constitute 10-15% of a company’s customers, and produce about 150-200% of reported profits
• Profit Drain customers: Large, money-losing customers, who constitute about 10-15% of a company’s customers, and erode about 33-50% of this amount
• Profit Desert customers: the remaining small customers, who constitute roughly 70-80% of a company’s customers and produce miniscule profits while consuming half or more of an organization’s resources
This is the essential starting point of your supply chain disruption management process.
Profit Peak customers are relatively few and very important. CFOs should be in consistent contact with them to carefully monitor their needs and provide support. Such customers warrant the highest allocation of scarce products. This is a period when additional care and walk-throughs will enable the establishment of closer cooperative bonds with key customers, providing a crucial pathway to a greater share of wallet. Building a direct supplier CFO to customer CFO link as part of a multi-functional engagement team, with periodic personal calls, is a critical part of this process.
Profit Drain customers are relatively few, but are nonetheless important because they drain profits. The issue with this category of customers typically is not below-market pricing, but unmanaged operating problems (such as excessively frequent ordering, problematic product mix) that is relatively easy to fix, and benefit for both companies. These customers warrant a lesser, but significant allocation of scarce products.
However, CFOs have a very important opportunity to engage their Profit Drain customers in a process to fix the operating problems, elevating some to Profit Peaks. They can offer an incentive of a higher allocation to induce Profit Drain customers to engage with the organization in this process. Again, establishing a direct supplier CFO to customer CFO link for those Profit Drain customers to become Profit Peaks is crucial.
Profit Desert customers are numerous and generate minimal profit. A few of these customers may be appropriate for a development program (e.g. a large customer where you have a low share of wallet, or a new, high-potential account). Generally, however, the Profit Desert customers should get a much lower allocation of scarce products, except development program accounts should get a higher allocation as an incentive to become Profit Peak customers.
4. Avoiding locked-in costs:
Increased shipping and transportation costs get embedded into product costs unless an organization completely sources their own raw materials out of the earth and then manufactures it in that exact same spot. Higher shipping and logistics costs may push some finance leaders to renegotiate logistics agreements. However, it’s not a good time to do so because there’s a great deal of uncertainty about the market’s future. In the several months to come, prices will not return to pre-pandemic levels, but they could drop from their current range, meaning 30% to 50% higher than they were before covid.
5. Brace for supply chain normalcy:
Shocks in the supply chain will eventually subside, the troubleshooting efforts will end, and backorders will disappear. Improved planning and forecasting, if an organization undertakes the effort, will prove useful as lead times return to typical levels and suppliers return to realistic production schedules. It will also help if consumer and business-to-business demand wither due to persistent price inflation.
Finance leaders should avoid double-ordering from different suppliers, just-in-case ordering, building extraordinary hedge inventories, and any other unrealistic procurement tactics that helped their organizations scrape by through the pandemic. Additionally, as with shipping and transportation costs, CFOs should be careful not to lock in temporary inflationary pricing on long-term supplier agreements.
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